Bank of America sees Treasury curve biased to steepen

Bank of America has observed that the Treasury yield curve is inclined to steepen due to investors favoring short-term bonds over long-term securities. The bank attributes this shift to fund inflows and asset manager positioning favoring the front end of the curve since the Federal Open Market Committee's July meeting. The bank's futures positioning proxy has transitioned from signaling a sell-off to a curve-oriented setup.

Active bond funds have sharply decreased their duration exposure following the July FOMC meeting, presenting an opportunity to add risk back in if inflation data eases concerns about higher interest rates. Commodity Trading Advisors remain predominantly short, particularly on the front end of the curve, although momentum signals have not yet changed.

The bank's US economics team anticipates a core Consumer Price Index of 0.20% month-over-month in July, which may leave September rate hike expectations unresolved unless Personal Consumption Expenditures inflation data suggests otherwise. A print suggesting no increase in September rates could challenge bearish positioning, especially considering the substantial Commodity Trading Advisors shorts and underweight active fund exposure.